What Are Cryptocurrencies?

Cryptocurrency is a digital or virtual currency that uses cryptography to secure its transactions and to control the creation of new units.  They are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.

How Do Cryptocurrencies Work?

Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.

Cryptocurrencies are created through a process called mining. Miners are rewarded with cryptocurrency for verifying and committing transactions to the blockchain. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Since then, over 13,000 other cryptocurrencies have been launched.

What Is Blockchain Technology?

Blockchain technology is a distributed database that allows for secure, transparent and tamper-proof transactions. It is best known as the technology behind bitcoin and other cryptocurrencies, but its potential uses go far beyond that.

The blockchain is essentially a digital ledger of all cryptocurrency transactions. It is continuously updated and shared between all users of the network. This makes it ideal for secure, transparent and tamper-proof transactions. Because the blockchain is decentralized, there is no single point of failure and it is immune to hacking attacks.

How Does Cryptocurrency Mining Work?

Cryptocurrency mining is the process by which new coins are created. Miners verify and confirm transactions on the blockchain and are rewarded with cryptocurrency for their work.

Cryptocurrency mining is a resource-intensive process that requires significant computing power. To be profitable, miners must have access to cheap electricity and high-performance hardware.

The first step in crypto mining is to verify and confirm transactions on the blockchain. Miners use special software to solve math problems that verify each transaction. When a transaction is verified, it is added to the block and broadcasted to the network. Miners are rewarded with cryptocurrency for verifying transactions.

The amount of cryptocurrency rewarded for verifying a single transaction varies depending on the currency being mined.

What Are Cryptocurrency Exchanges?

Answer: Crypto Exchanges are online platforms where you can buy (for example, check out how to buy bitcoin with bpay), sell or trade cryptocurrencies for other digital assets or traditional currencies such as USD. Types of exchanges include centralized exchanges, decentralized exchanges (DEX), P2P exchanges and glass-ceiling exchange. Typically, investors use crypto exchanges to buy cryptocurrency with Fiat currency i.e. government-issued currency like USD, EUR etc., which can be used to purchase other cryptos or given in return for goods/services. Some of the most popular crypto exchanges are Coinbase, Kraken, Binance etc.

A lot of people still don’t understand what a cryptocurrency exchange is exactly. Crypto investing is new and many of the general concepts are still not well understood.

Why Has Cryptocurrency Gotten So Popular?

Cryptocurrencies have become popular because they offer a number of advantages over traditional currency. For example, cryptocurrencies are digital and decentralized, which means they are not subject to government or financial institution control. This makes them more secure and less prone to fraud, manipulation and less susceptible to political risk.

Additionally, cryptocurrencies can be used to purchase goods and services online without providing personal information like bank account numbers or credit card numbers. This makes them ideal for online transactions and can help protect users’ privacy. Finally, the value of cryptocurrencies is determined by the market, so they can provide opportunities for investment return potential that traditional currencies do not offer.

Finally capital flow has driven the popularity of the crypto field.  Crypto currency is popular largely because this sector of the economy is attracting a large amount of capital.   Capital inflow and the publication of high returns tend to generate headlines and accordingly investor interest.

How Do I evaluate A Cryptocurrency Investment?

When it comes to cryptocurrency investments, there are a few key things you need to take into consideration before making a decision. Here are a few tips on how to evaluate cryptocurrency investment opportunities:

1. First and foremost, you need to make sure that the cryptocurrency project is legitimate.  Information regarding cryptocurrency markets is often quite limited. There are many scams in the space, so doing your due diligence is crucial.  A list of red flats to look for include:

  1. Promises of guaranteed returns
  2. Lack of transparency
  3. Unrealistic claims
  4. Lack of oversight in the crypto organization
  5. Psychological manipulation like blackmail or extortion
  6. False claims of celebrity or social status

2. Once you’ve ascertained that the project is legitimate, you need to assess its viability. There are at least five metrics that you need to look at if you are going to evaluate a cryptocurrency for investment.

Metrics to Look at When Evaluating A Crypto Investment

  1. Staff involved: Does the team have the necessary expertise and experience to execute on their vision?  Are they industry leaders with a strong track record, or are they new in the field?
  2. Business Model: Is the project you’re looking at investing in have an innovative or more efficient business model than the existing competition?  Is their model viable?  Do you understand their business model?
  3. Market Adoption: Is the crypto community widely adapting the currency? Is there a real demand for this solution?
  4. Technology Used:  What kind of technology does the crypto company use? If it is blockchain technology, is it scalable for the
  5. Funding and Backing: How is the project being funded?  What organizations are supporting it?  Are they using venture capital?  If so, what is their burn rate?  If the company is self funded, what is the source of their funding? Is it sustainable?

All of these assume you are going to take a long term “buy and hold perspective” in a crypto investment.

If you are simply interested in simply trading cryptocurrency, the approach is a little bit different.  Here are some thing to keep in mind:

Asset allocation:

A lot of cryptocurrency traders place their capital in major coins like Bitcoin or Ethereum.  These have much higher trading volume than smaller altcoins and are therefore easier to trade.  Many trader also use something called “technical indicators” which are measurements of price and trading volume. On smaller altcoins, there is often less information about volume and price, which is why some crypto traders stick to the bigger coins.

On the other hand, traders with more of an appetite for risk sometimes allocate more of their capital to smaller altcoins.  All small cap and mid market capitalization coins, have higher risk, there also offer higher upside potential.  Some smaller altcoins have risen over 1,000% in days or months, which make them attractive for risk tolerant traders.

Trading Strategy:

There are a number of strategies available for Crypto traders.

Buy and Hold (HODL)

In the crypto world, “HODLing” refers to the strategy of holding onto a digital asset for the long term, rather than selling it as soon as the price goes up. This strategy can be risky, since crypto prices are notoriously volatile. However, crypto investors who are patient and HODL their assets for the long term can potentially reap big rewards through the long term appreciation of their underlying assets.

One of the main advantages of HODLing is that it allows investors to avoid the fees associated with frequent crypto trading. Over time, these fees can add up and eat into your profits. By HODLing your crypto, you can avoid these fees and potentially maximize your returns. HODLing is not without its risks. The price of a digital asset could drop sharply at any time, and HODLers could miss out on a great opportunity to sell. However, for investors who are willing to take on a little bit of risk, HODLing can be a lucrative strategy.

Crypto Futures Trading

Futures trading is a popular way to trade crypto assets. A crypto future is a type of contract that allows two parties to buy or sell an asset at a set price and date in the future.  Investors use futures contracts to hedge against price volatility or to speculate on the direction of the market. Crypto futures can be traded on a variety of exchanges, and they offer a number of benefits to traders. For example, crypto futures allow traders to take a long or short position on an asset, and they can be traded with leverage. In addition, crypto futures have low fees and can be traded around the clock.

Crypto Arbitrage Trading

Arbitrage trading is a crypto trading strategy that involves taking advantage of price differences between exchanges. For example, if Bitcoin is selling for $10,000 on one exchange and $10,050 on another, a trader could buy Bitcoin on the cheaper exchange and then sell it on the more expensive exchange, pocketing the $50 difference. Arbitrage trading can be a great way to earn profits in the crypto market, but it requires careful planning and execution. In order to be successful, traders need to have a deep understanding of the market and be able to move quickly to take advantage of price discrepancies.

There are a number of other crypto trading strategies including using bots, scalping or swing trading.

Additional Reading

Finally, if you are looking for some additional reading, consider reading these titles:

Blockchain Basics: A Non-Technical Introduction in 25 Steps, by Daniel Drescher.

Blockchain Basics is a plainly written and easy to read introduction to the basic concepts that cryptocurrencies are built on.  It is commonly cited as one of the best books on cryptocurrency.

The Everything Guide to Investing in Cryptocurrency: From Bitcoin to Ripple, the Safe and Secure Way to Buy, Trade, and Mine Digital Currencies, by Ryan Derousseau.

Derousseau’s book is a nuts and bolts introduction to the world of cryptocurrency.  The Everything Guide has a number of chapters with basic instructions for getting started in crypto.

The Bitcoin Standard: The Decentralized Alternative to Central Banking, by Saifedean Ammous.

The Bitcoin Standard makes a lot of the ‘top crypto” book lists.  Saifdean’s book is less about cryptocurrency, and more about the specific history of bitcoin.  Its historical focus is more for serious thinkers, but it is a good introduction to some of the broader macroeconomic issues means it is a “must read”.

Author

  • James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek.  When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors.   James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College.  He loves individual stocks, crypto investing, bonds and precious metals.

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